Strong rental growth rates in the industrial sector continue to be buoyed by historically low levels of available supply, according to Savills latest Shed Breifing report.
According to the research, investor appetite, particularly new capital, is persistent, driven by the income-upside and strong underlying demand fundamentals, which are getting an extra boost from recovering supply-chains and the faster than expected rise in Australia’s population growth rates.
“The strength of the occupational market is steadfast, with a historically low vacancy rate nation-wide and a rebound in some macro drivers,” said Katy Dean, Head of Research at Savills Australia.
The research found that take-up of existing space in Q2 was 60 per cent more than its three year quarterly average.
The record low vacancy rate, which averages below 1.0 per cent in some areas limited the churn of existing space in Q1 and total leasing take-up volumes dipped to c.700,000sqm on the east coast.
However, in Q2, c.1.03 million sqm was leased on the east coast, making it the busiest quarter since Q3-2022.
According to Savills Shed Briefing, 30 per cent of the deals reported in Q2 were for speculative or pre-committed space, indicating that some companies are focused on improving operational efficiencies and supply-chains, while for others, the outlook for persistent low vacancy is helping to cement future plans on their floor space requirements.
“The increase in take-up volumes suggests that economic headwinds are being partially offset by an even sharper focus on securing supply chains and building in efficiencies to cope with rising costs, including increased labour and transport costs, as well as higher rental rates,” Ms Dean said.
Michael Wall, National Head of Industrial & Logistics at Savills Australia said more than a third of the pipeline due to come online this year is already committed, with the lack of new product to lease and recovery in the supply-chains combining to push up rents.
As outlined in the latest Shed Briefing report by Savills, Sydney’s prime net face rents have surged by 31.5 per cent in the past year, with an additional 5.9 per cent increase in the second quarter. Melbourne has demonstrated a similarly robust performance, witnessing an average annual rent growth of 27.2 per cent, following a 6.3 per cent rise in Q2.
In the case of Brisbane, rents increased by 14 per cent year-on-year and by 3.7 per cent in the second quarter. Adelaide experienced an 8 per cent average yearly rise, with a more modest 2.7 per cent increase in the first quarter. Perth recorded a 13 per cent year-on-year increase in rents, remaining steady in Q2 after an average growth of 5.3 per cent in Q1.
“Compared to three years ago, prime rents have grown by 42% and secondary, nearly 50%, increasing the potential for rent reversion to market in most markets,” Ms Dean said.
“This supports the outlook for income growth for investors and mitigates a large proportion of the yield expansion that has occurred.”
Mr Wall said structural tailwinds for industrial and logistics are very healthy.
“This continues to be supported by the investment appetite to deploy capital through this cycle, but there is some caution in the broader economy, with the early emergence of sublease space on the market,” he said.
“On the back of this, developers are likely to take a more cautious approach on future development levels and rental growth assumptions, despite recent record growth.”
Savills has tracked approximately 2 million square metres in new industrial developments on the east coast, all of which are earmarked for completion in 2023, with around 770,000 square metres of this stock already delivered.
The report found that estimates for Q2 indicate c$2.4 billion has transacted (+$5m), which is about 52% more than what transacted in Q1-23.
Mr Wall said new capital sources are emerging, with overseas pension funds, the US and Japan contributing to the return of some of the larger scale deals.
The report found an increase in owner-occupier and private investor activity, accounting for 50 per cent of investment transaction volumes in Q2.
Savills said the trend suggests that private capital and lower-leveraged buyers are acting opportunistically.
“Privates are typically proving to be more nimble when it comes to snapping up industrial assets – they also don’t face the same issues as institutional capital, benefiting from reduced competition, and ability to be more flexible as less constrained by debt costs when deploying capital,” Ms Dean noted.